Defining a Broker-Carrier Agreement
A broker-carrier agreement is a binding legal contract between a freight broker and the freight carrier that a broker hires. The contract includes key provisions that cover the obligations of the broker and the carrier, as well as the process for resolving disputes. Namely, the contract will address the ways in which a dispute may be resolved – which typically requires some sort of mediation involving a neutral third party. The purpose of a broker-carrier agreement is to ensure that both parties are on the same page about each party’s responsibilities, and to provide a mechanism for resolving disputes. A broker-carrier agreement may also identify the actual law that will be applied when a particular dispute arises. For example, it will usually specify whether the contract will be governed by state law or the rules of the National Freight and Transportation Association . In some cases, the agreement may specify which federal law will apply. Additionally, the designated jurisdiction of the agreement is often stated as well. Typically, the agreement states that the jurisdiction for any disputes that arise between the two parties will be the jurisdiction of the broker’s state or the state in which the carrier is organized. Broker-carrier agreements are important in order to impose liability on the party in breach of the agreement. In essence, you can hold the party in breach of the agreement accountable for any damages that ensue from that breach. For example, if a broker fails to fulfill a promise in the agreement, and the carrier can prove that this failure caused bone fide damages, then the carrier will be entitled to recover for those damages.
Top Clauses in Broker-Carrier Agreements
A broker-carrier agreement typically contains multiple clauses crucial to governing the agreement. The following are some of the most essential clauses:
Payment Terms: Typically, the broker must pay the carrier within a certain timeframe (i.e. 30 days) of receipt of the invoice. The agreement may also provide for an automatic 1.5% late fee for each month past the deadline date. The agreement should also clearly set forth the payment method (i.e. check or electronic transfer) and should obligate the broker to advise the carrier, among other things: (i) when the broker receives the funds from the shipper; (ii) the amount received; and (iii) the time period during which the funds were held by the broker (this term is often a 24-hour period).
Liability: Typically, a broker’s liability is based on a "totality of circumstances" approach and is limited to damages caused by gross negligence or willful misconduct or certain enumerated violations by the broker. It is important for both brokers and carriers to understand that, pursuant to 49 U.S.C.A. § 14101(b), it is illegal for brokers to diminish, limit or eliminate a carrier’s duties toward a shipper, and certain actions will cause parties who have knowledge of the Act to incur civil penalties.
Cargo Claims: These clauses set forth the procedures for filing claims, including, among other things: (i) the types of loss or damage that are covered; (ii) what constitutes timely notice; (iii) what constitutes a "proof of loss"; and (iv) how claim denials and/or disputes are to be resolved.
Insurance: The broker may be required to provide its surety bond, as required by the Federal Motor Carrier Safety Administration. Carriers may also be required to carry insurance that protects against certain areas of liability. It is important to note that such insurance policies may require additional coverage for claims arising under the Carmack Amendment, 49 U.S.C.A. § 14706, which governs claims for cargo loss or damage.
How to Create a Broker-Carrier Agreement
Before putting pen to paper, each party (broker and carrier) should take a moment to consider their interests in the transaction they seek to memorialize. For example, are there specialized cargo needs, a salvage clause, price protection against fuel surcharges, liability, indemnification, or other issues the parties must negotiate before concluding the deal? Along similar lines, the parties should seek legal advice (if necessary) during this early stage. They should review their respective agreements to determine how they will dovetail. An agreement must address if a freight broker appoints the carrier as his agent, or if unintended, that the broker is not holding himself out as a principal to the transportation. The parties should also understand how the agreement remains effective, and the manner in which it may be terminated. A failure to consider what happens to the contract if the relationship between the parties ends could subject either party to liability or an inconvenience. After the first draft of the broker-carrier agreement is written, the negotiating process will begin. Allow for give and take between the parties during this difficult but necessary phase, as you will be able to reach an agreement covering the full range of issues relevant to your transaction. And remember, the entire purpose for the negotiations and drafting of the broker-carrier agreement is to make sure you have an open line of communication, and that the conveyance of goods and services occurs in a manner satisfactory to both parties.
Common Pitfalls to Look Out For
One of the most common mistakes that brokers make in setting the terms for the broker-carrier agreement is customizing the form itself instead of developing a program or template with consistent terms. The broker-carrier sample they have creates an illusion that all of the terms are unique when in fact they are used repeatedly with all carriers. This process, however, allows a broker to later show what is reasonable and what is not reasonable in the evaluation and adjustment of claims. The broker should always be able to provide ample evidence that all of its carriers signed the same terms, which are reasonable under all circumstances.
Another error brokers often overlook is clearly addressing what happens when a carrier ceases to do business with a broker. There are two steps to consider when a termination happens. First, the process of wind down must be carefully laid out in the broker-carrier agreement whenever a broker begins doing business with new carriers. Once a termination happens, that issue must then be addressed so a carrier can easily process the shipment of freight once it becomes effective. The processes for both situations may be different and are best laid out in the broker-carrier agreement itself . A broker needs to be able to point to a policy every time it terminates a carrier and quickly provide that information when needed.
Carriers, as always, must be sure to vet each agreement very carefully before signing or even presenting the sample to their attorney. A carrier should have an understanding of what they require of a broker before they decide to do business with them. A broker should be able to provide in the broker-carrier agreement a clear picture of what their broker business continues to do on behalf of the carrier and exactly how they will bill and pay them for the services rendered. Carriers should recognize that most brokers are just trying to protect themselves by shifting the liability for delays, damages, and lost freight. However, some brokers shift the risk beyond what the law would require. These brokers need to be avoided if the carrier does not agree with some of the more onerous requirements.
A carrier always has the option to try to negotiate the terms to make them less one sided. A carrier should include language that allows for the contract to be modified at a future date if necessary. This way, if changes in the law or trade practices require further negotiations, the carrier is able to secure its interests.
Drafting for Success: How Templates Can Help
Given that the vast majority of brokers and carriers draw up their own broker-carrier agreements, the decision of the parties to use a template can speed up the process. This is certainly the case when compared to negotiating and drafting a contract from scratch.
A major disadvantage of broker-carrier agreement samples is that they are often generic in nature. They may not contain specific references to issues that are especially important to a particular broker or a particular carrier. Further, some of these samples may originate from other areas of the country, which can lead to additional problems, such as when laws that apply in those areas are referenced in an agreement intended for use in Ohio.
Broker-Carrier Agreements: A Real-Time Usage Guide
It is easy to see the pros of a lack of an asset fleet and the lower costs to a motor carrier‐ as‐ broker, but the reality is "You have no idea the extent of exposure you have if you do not have a well‐prepared broker‐ carrier agreement in place with every carrier that you hire." The lack of a broker‐ carrier agreement is at best tempting fate or the result of carelessness, at worst, deceptive. The below case study and real life examples will demonstrate the need for a well‐ written and well‐ structured broker‐ carrier agreement and the potential exposures when one is missing.
Issue of Liability: Broker’s Liability for Carrier’s Negligence It is normal and customary within the transportation industry to allow carriers to use subcontracted transportation providers. There are two (2) areas where the risk is heightened for the broker‐ carrier when this is the practice. 1. First, the broker‐ carrier must ensure that it adheres to regulations set forth in 49 C.F.R. § 371.113 which states: "A broker may arrange for the transportation of property only by a carrier that possesses a valid operating authority." This seemingly simple rule has been the crux of litigation and cause for carriers and brokers to be found negligent in transporting or hiring carriers to transport property. To address this risk, brokers should make sure that they only use freight carriers who have valid operating authority. 2 . Second, under the Carmack Amendment, the principle of vicarious liability extends to the broker‐ carrier when a participating carrier is involved in the claim. The public policy reasons behind the vicarious liability of a participating carrier are: (1) to grant full compensation to owners of cargo losing or damage in interstate transportation; and (2) to promptly shift the cost of full cargo liability to those most capable of averting loss. (5) So, not only can a broker be held liable for actions of a subcontracted carrier, they can be liable for a principal carrier with whom they have engaged in freight brokerage and agreed to pay.
Case Study: FreightForwarders, Inc. v. All‐States Freight Systems, Inc., 518 F.2d 1081 (6th Cir. 1975) In FreightForwarders, the Court held that a broker was liable for the loss in shipment of goods by the participating carrier even though the broker had a broker‐ carrier agreement in place that purported to release the broker and participating carrier from any liability. So, let’s say a carrier on a particular transaction has an asset fleet, but sub‐contracts to another carrier – who has no operating authority – this is where a broker‐ carrier agreement can protect a broker carrier. In C.P. Electronics, Inc. v. Kuhlman Electric Corp., 178 Cal.App.3d 1, 223 Cal.Rptr. 645 (1986) the Sixth Circuit did uphold a blanket agreement with the terms that the broker would indemnify the principal carrier for its liability in damages claims arising out of the terms of the contract.